Feb 23, 2026
In his sophisticated 20 January address to the Davos World Economic Forum, Canada’s prime minister and former Bank of England governor Mark Carney offered an insight into the disintegration of the global economy which went well beyond the usual strictures on Trump for mental instability or megalomania.
While Canada, like other middle-sized powers, had prospered under the protection of the ‘rules-based’ international economic order, their understanding of such an order was ‘partially false’. Far from being spontaneously self-enforcing, the rules-based system depended on the United States. The fiction of a non-hegemonic world was useful because it disguised the extent of the free world’s, especially Europe’s, dependence on American leadership. It was this leadership which provided the public goods — open sea lanes, a stable financial system, collective security, and a mechanism for resolving disputes — needed to maintain an open world economy.
But the system, Carney said, no longer worked. ‘We are in the midst of a rupture, not a transition.’ When the United States defected from the world order it had built since 1945, effectively joining the revisionist powers of China and Russia, it was clear we were headed back to the ‘spheres of influence’ world of the 19th century. What then should small and medium-sized countries like Canada (or Britain) do to retain their independence from the predatory beasts in the international jungle? ‘If you are not at the table, you are on the menu.’
The precarious nature of liberal globalisation had been pointed out many years earlier by the British economist Lionel Robbins. The liberal economic project had failed to understand that a global liberal economy needed a political foundation. ‘Resting, so far as policy within states was concerned, upon the assumption of a firm foundation of law and order backed up by an apparatus of coercion, it blandly assumed that between states harmony would be secured by the mere perception of long-run self-interest’ A regression to protectionism was inherent in this liberal blind spot. What Robbins failed to explain was how the liberal economy had persisted globally for long periods of time without the explicit foundation of world government.
C. P. Kindleberger offered a Keynesian answer with his theory of hegemonic stability. An international economy without a world state requires a leading power to stabilise it. The hegemon had to provide three essential counter-cyclical services: maintain an open market for imports, maintain a flow of investment, and ‘discount in crisis’. The leading power needed to practise discretionary Keynesian policies on a world scale to enable other countries to ‘stick to the rules’.
Kindleberger’s explanation of the ‘rupture’ of the interwar years was straightforward: ‘The world economic system,’ he wrote, ‘was unstable unless some country stabilised it…. In 1929, the British couldn’t, and the United States wouldn’t. When every country turned to protect its national private interest, the world public interest went down the drain’. Reacting to the greatest depression of modern times, the world economy split up into economic blocs; the revisionist powers, Germany, Japan, and Italy, went to war for territory.
Kindleberger thought that the breakdown of hegemonic power was inevitable. The British and ultimately American-led world economies collapsed because the hegemons lacked the ability to tax the recipients for the services they were providing. ‘Free riding’ by beneficiaries was bound to drain the leader of its economic power. Its trade surpluses turn into deficits as it provides the rest of the world with security, capital, and liquidity. The liberal system then disintegrates. So, in the 1970s, Kindleberger predicted what Carney in 2026 claimed has come to pass: the end of American hegemony with no obvious replacement.
This denouement took a long time in coming.After 1945, the United States, as the world’s leading creditor accepted its Kindlebergian responsibility to underwrite a restored liberal economic order. It committed itself to maintain the dollar’s external convertibility into gold at $35 an ounce, all the other members of the system pegging their currencies to the dollar and holding most of their reserves in dollars.
But this bargain worked only as long as domestic US policy kept the dollar itself sufficiently scarce to make the convertibility guarantee credible. In the 1960s, war and democracy, the twin scourges of price stability, combined to release the brake on dollar creation. Printing dollars to pay simultaneously for the NATO alliance, the Vietnam war, and Lyndon Johnson’s Great Society programme caused a world upsurge in prices, a drain of gold out of America, and suspension of dollar convertibility into gold in 1971. The United States sabotaged the system it was underwriting. National interest came before global stability.
The same has happened again. The end of dollar convertibility into gold in 1971 did not bring about a real rupture in the dollar-led system. This was because what Giscard d’Estaing in 1965 called the ‘exorbitant privilege’ of the dollar depended less on its link to gold than on its reserve status, a first-starter advantage which over time became almost impregnable.
Because of its embedded role as a reserve currency, the failing dollar of the 1960s became the mighty petrodollar of the 1980s; the East Asian financial crisis of the late 1990s brought a flood of new dollar reserves to the United States.
The paradox of the situation was that whereas the growing US current account deficit should have caused an outflow of dollars and the lowering of the dollar exchange rate, the reserve position of the dollar led to an inflow of dollars and the strengthening of the US dollar exchange rate. These inflows allowed the United States to become the world’s ‘consumer of last resort’, but at the cost of growing import surpluses, which hollowed out its industry. So Trump followed in the footsteps of Nixon and, as Carney put it, ‘broke the bargain’ on which the system lived.
Trump’s tariff policy is designed to eliminate the import surpluses on which the dollar’s reserve position depends. What is going on is a messy retreat of the dollar, a spontaneous, if slow, diversification of reserves into a mixture of other currencies, metals, and cryptocurrencies in the face of the weaponisation of fading, but still formidable, US power. In 2000, the dollar accounted for 71% of world reserves; by 2025 it was down to 57%.
Carney accepts that when the rules no longer protect you, you must protect yourself. But he rejects a world of 1930s-style ‘fortresses’. Instead, he offers a ‘third path’ between protectionism and subordination: the sharing of sovereignty among groups of countries to provide collective goods for different groups. ‘From the fracture we can build something bigger, better, stronger, more just…. This is the task of the middle powers.’
Carney’s invitation to thought begs two vital questions. What public goods are needed for a well-functioning market economy? And can they be provided by collective agreement? Kindleberger, as a Keynesian, gave his hegemon the crucial role of stabilising the economy by active counter-cyclical policy. This steadying role is now vacant. If history is any guide cooperation alone will not insure against economic disorder.
Ultimately, the question is about the necessary conditions of a free economy and society. The economist Friedrich Hayek believed that a competitive market produced its own order — the spontaneous order – with a minimal state needed to maintain the rules of the road. Keynes believed the spontaneous order would collapse without a stabilising force from outside. On this matter, we await Carney’s further thoughts.
Robert Skidelsky 